a outward orientated growth strategy, based on openness and increased international trade.
* Growth achieved by concentrating on increasing export and exp revenue (leading factor in AD)
Increasing exports increase GDPhigher incomegrowth in domestic/export markets.
Policies for country to achieve export-led growth:
* Liberalized trade ??“ open up domestic markets to foreign competition
* Liberalized capital flow- reduce restriction on foreign direct investment
* A floating exchange rate
* Investment in the provision of infrastructure
* Deregulation and minimal g`nment intervention
The theory- in reality countries do not need the adoption of these.
Difference between exporting primary products and/or manufactured products:
* Many developing countries depend upon the export of primary products in order to gain export revenue. However, this has been downward for many years due to increasing supply and insignificant increase in demand. Thus, the export led growth based on export of primary products is unlikely to be achieved.
* Focus on increasing manufacturing exports.–>???Asian Tigers???: Japan, S Korea, Hong Kong, Singapore, Taiwan. They export products in which they have comparative advantage, based on low cost labour. This products changed over the time to more sophisticated ones, using capital-intensive production methods and more highly skilled workers.
Problems associated with export-led growth:
* The success with ???Asian tigers??? increased the protectionism in developed countries as they could not compete against the low wage imports. Thus the g`nments placed tariffs and quotas on the lower-priced goodsprice increases, develop countries export primary prod.
* Necessary conditions for exp-led growth. ???Asian tigers??? g`nments provided infrastructure, subsidizing output through low credit, promoting savings and improvements in technology. Also g`nments adopted policies about protectionism ??“ ???infant industry???.
* If countries attempt to kick-start their exp-led growth by attracting MNCs, there is always a fear of MNCs becoming too powerful, which can led to problems.
* Free-market exp-led growth may increase income inequality in country. In this case the economic growth may be achieved at the expense of economic development.
Import substitution (ISI)
Inward- orientated strategy, states that a developing country should produce products domestically rather than import themdomestic industries will growgrow of economyenter the competitive world and gain from economies of scale.
Conditions for the strategy:
* G`nmnet policy of organizing the selection of goods to produce domestically(labour-intensive, low-skill manufac goods).
* Subsidies to encourage domestic industries
* G`nment needs to implement a protectionist system with tariff barriers to keep out foreign imp.
Advantages of ISI:
* Protects job in the domestic market
* Protects the local culture and social events by isolating foreign influence
* Protects economy form the power, bad influence of multinational corporations
Disadvantages of ISI:
* Protects jobs in the Short Run. In the LR, eco growth may be lower and the lack of growth may lead to lack of job creation
* ISI means that countries do not gain benefits from the comparative advantage and specialization, producing inefficient products but could efficient import from others
* ISI may lead to inefficiency on dom industries as they do not face competitiveness
* ISI may lead to high rates of inflation due to domestic aggregate supply constraints
* ISI may cause other countries to take retaliatory protectionist measures.
Eg of countries adopted ISI: Latin America: Argentina, Brazil, Mexico,Chile.
The Washington Consensus
In 1989, American economist John Williamsons identified 10 common reforms necessary for economic growth. The policies were:
* Fiscal discipline-balanced budgets
* Redirection of spending priorities from indiscriminate subsidies to basic health and education
* Lowering of marginal tax rates and broadening of the tax vase
* Interest rate liberalization
* A competitive exchange rate
* Trade liberalization
* Liberalization of FDI inflows
* Securing of property rights
This claims that this reform is just a way to ensure that MNCs have access to cheap labour markets in developing countriesit can produce inexpensive productswhich are sold for high prices in developed countriesMNCs make high profits and workers gain little.
The consensus did not led to high economic growth but to crises and increased debtincrease in income inequality and exploitative working conditions.